Principal-Agent

The triangular principal-agent model is an organizational relationship in which an agent has to act in accordance to the interests of two different principals. My mom works as a retail manager, and her job centers around this. Her two principals are the customer and the company she is employed by. For the customer, she must find a product that they are interested in purchasing. However, finding a “good deal” for the customer hurts the company, and thus is detrimental to maximizing her own profits (through commission) and her other principal, the company. This is especially true because commission is directly linked to selling products for their full retail value, with commission on discounted products also being disproportionally less valuable because less profit is made off these products.

The department store she works at seeks to maximize profit by selling products that have low cost and high retail price. In a department store, the main products that satisfy these criteria are designer clothes and cosmetics (such as perfume and makeup). There are two demographics of customers that are advantageous for my mom. The first is a consumer who buys goods for the sake of buying goods- this would include those who are affluent to the point of not even looking at price tags as well as those who partake in “retail therapy” and find joy simply through purchasing things. However, most consumers buy goods that they can derive the maximum value from. The other subset includes people who are focused on name brands and luxury goods. Luxury goods are extremely beneficial for sales associates as they require very little “selling”; the brand sells itself. Many people ask my mom – is this product worth it? In this case, it’s a conflict of her two principal’s conflicting interests. While it’s possible sometime to sell a product where both the consumer and the retail company are satisfied with the sale, most of retail stores operate around the premise of acting as a middle-man to peddle marked up goods to consumers. Fundamentally, these two principals lie in conflict with each other, and there is no real way to resolve this conflict without taking one side.

An added issue is that one of the most reliable way to keep up an influx of customers and sales is through customer loyalty. If a customer feels that an associate cares for them and their needs, they are much more likely to return to the store and specifically seek out the associate’s help. My mom is very much a people person and thus loves interacting with customers in a positive and meaningful way. It can be difficult for her to both be true to her loyal customer as well as her employer.

In practice, no real direct resolution can exist between the retail consumer conflict. However, there exist situations that can cause both parties to be appeased. My mom frequently considers large blowout holiday sales to be “win-win” situations for the customers and the retail company. While the consumers get products marked down from their typical price, the companies also get the sales of customers who buy other products that are not marked down and the company can make their usual profit of these purchases. The company relies on the consumer buying goods that aren’t marked down to support the loss of profit from reducing the prices on other products.

Interestingly enough, it is not sufficient that an agent (a retail worker) only works for the interest of one party. If the worker only works to the satisfaction of the customer, they will be promptly fired by retail company for failing to produce profits. However, if the worker works solely for maximizing the profits made by the company, it will probably be more difficult for them to conduct as many sales as a more customer-friendly retail worker. It is crucial to balance out the relationship between these two masters and find an agreeable balance as to satisfy both parties.